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Western Canadian Producers Hit by Lower Gas Prices

Producers in Western Canada, who were already heavily dependent on natural gas, increased their weighting from oil to gas even more during 1Q2009, according to a survey conducted by Canadian research firm Bryan Mills Iradesso.

The survey, which tracks the performance of all junior and intermediate oil and gas companies and trusts that operate in Western Canada and trade on the Toronto Stock Exchange (TSX) and TSX Venture Exchange, found that the median junior company's production was weighted 76% to gas in 1Q2009, an increase of 5% compared with 1Q2008. The median intermediate's production was weighted 67% to gas in 1Q2009, up from 63% in 1Q2008.

The increases come as oil prices have rallied to seven-month highs, meaning that companies leveraged to oil production should be experiencing a comeback, according to Bryan Mills Iradesso President Peter Knapp. Some conventional oil and gas producers are finding their operations "economically challenged" as they await a recovery in natural gas prices, Knapp said.

"Markets have reached the point where the price of oil is about three times that of natural gas based on the standard energy equivalency. With many of the costs still high in the sector after the run-up of recent years, this has not been an easy time to make money on natural gas," Knapp said.

The study compared the results of 63 juniors (companies producing 500-10,000 boe/d) and 23 intermediates (companies producing 10,000-100,000 boe/d). Only six of the juniors and 10 of the intermediates reported profits for 1Q2009, a sign that the costs of Canadian oil and gas production "are currently too high for the revenue being brought in," according to the report. Bryan Mills Iradesso also found that seven juniors -- the most since the firm began the survey six years ago -- reported negative cash flow for the quarter.

Median cash flow netbacks for juniors was C$11.85/boe in 1Q2009, down from C$28.33/boe in 1Q2008. For intermediates the median cash flow netbacks was C$20.43/boe in 1Q2009, down from C$30.06 in 1Q2008. With low cash flow netbacks, the median junior (not including those with negative cash flow) is trading at a reasonable enterprise value (market capitalization plus net debt) of 8.3 times cash flow and the median intermediate is trading at an enterprise value of 7.3 times cash flow, according to the report.

The median junior is trading at a 62% discount to net asset value while the median intermediate is trading at a 26% discount, Bryan Mills Iradesso said.

Alberta's Energy Resources Conservation Board last week said the province's role as an international natural gas supply mainstay will shrink as aging wells are depleted and domestic consumption rises (see related story).

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